Is 6% a good return on investment?

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Russell BrazilBusiness Member
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Real Estate Agent 路 Washington, D.C. 路 Member since 2012 路 17k+ posts 路 30k+ votes
7y

There is no such thing as a good or bad return.  There is only your risk tolerance, and the risk associated with an asset.  

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  • Mark Fries
    Contractor 路 Jacksonville, FL 路 Member since 2017 路 1k+ posts 路 2k+ votes
    7y

    @Johann Jells

    馃憤

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  • Account Closed
    Rental Property Investor 路 Sacramento, CA 路 Member since 2015 路 1k+ posts 路 893 votes
    7y

    Yuck- 6% can be had far more passively in an index fund. Big no from this guy. 

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  • Johann Jells
    Rental Property Investor 路 Jersey City, NJ 路 Member since 2011 路 1k+ posts 路 876 votes
    7y
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  • Ned J.Pro Member
    Investor 路 Manteca, CA 路 Member since 2017 路 1k+ posts 路 2k+ votes
    7y

    So many different ways to calculate how "good" and investment is......some of the above % cited include an assumed X% appreciation year in and year out....and some of the bigger numbers are unrealized gains you don't ever see until you sell it..... so some of your reference numbers need to be based on what your short term goal of a return is and what the long term return is....so that perspective plays a role in what you consider a "good investment"....... does it pay me well NOW or am I only really seeing those #'s years and years down the road.....

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  • Johann Jells
    Rental Property Investor 路 Jersey City, NJ 路 Member since 2011 路 1k+ posts 路 876 votes
    7y
    Originally posted by @Ned J.:

    So many different ways to calculate how "good" and investment is......some of the above % cited include an assumed X% appreciation year in and year out....and some of the bigger numbers are unrealized gains you don't ever see until you sell it..... so some of your reference numbers need to be based on what your short term goal of a return is and what the long term return is....so that perspective plays a role in what you consider a "good investment"....... does it pay me well NOW or am I only really seeing those #'s years and years down the road.....

     There's no right answer, its very similar to the choice between Value and Growth stocks. Value like the ATT mentioned upthread pays now but is not likely to appreciate much, , while for decades no one had ever gotten a dividend from Apple but had made tremendous amounts of appreciation. 

    If you need cash now to live on, then your investment choices get limited. It's one reason househacking is so tremendously successful. I've not had any housing expense in 22 years living in my multifamily. I get an apartment that would cost me $3500/mo to rent, plus I don't pay tax on that, a  ~$55k benefit before my cashflow and appreciation. 

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  • Account Closed
    Rental Property Investor 路 Sacramento, CA 路 Member since 2015 路 1k+ posts 路 893 votes
    7y

    @Johann Jells I would agree with you about appreciation generating greater yield than cashflow, but this is highly contingent upon the market you're investing in and the timing of the market.


    I bought in CA in 2012 and my appreciation crushed the cash flow I would get in high yield properties now... but if I bought in CA now my short term appreciation during the next 5 years is likely to be negative. Cash flow would be negative too. This is not the economic phase to play the appreciation game in. Buy yield now in non-appreciating (and non-depreciating) markets, be in a better position next time we're in a low phase of the market, and THEN make your appreciation play. If you are willing to utilize market timing like this, then your portfolio will generate an optimal overall return over time. 

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  • Johann Jells
    Rental Property Investor 路 Jersey City, NJ 路 Member since 2011 路 1k+ posts 路 876 votes
    7y

    @Account Closed

    Today's market is odd. So far, at least here, it looks like the "soft landing" most economists dream of, rather than the sudden crash that terrifies people. The not quite bear equities market took the edge off the RE market, and the frenzy is gone without the bottom dropping out. Yet.

    I'm torn, I've regretted sitting out markets before, and I've got a lot of cash. Using the calculations above, a 25% down on a 0.5% rent to price property in a 5% appreciation market yields a long term return of 26%. My area has not seen under 5% average over 15 years for a long time, like over 30 years.

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  • Account Closed
    Rental Property Investor 路 Sacramento, CA 路 Member since 2015 路 1k+ posts 路 893 votes
    7y

    @Johann Jells I would agree with your 5% average over 15 years statement. My question is over a 15 or 30 year period, if you were to track the appreciation on a per year basis, would that average be 15%/yr over a 5 year span, 5% over a 5 year span, and -15% over a year span? Not exactly those numbers, but just to illustrate the scenario- holding the property over the best years then repurposing towards a higher yield for the worse years... then repurposing once again when the best time for appreciation returns would make you significantly more money than dollar cost averaging it all out.

    This of course is a bit more "active investor"-esque, and not for everyone, but if it can be executed well by an investor with good performance, wealth will compound way way way way faster.

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  • Johann Jells
    Rental Property Investor 路 Jersey City, NJ 路 Member since 2011 路 1k+ posts 路 876 votes
    7y

    @Account Closed  I finally found the flaw in your returns math!!! It took a bunch of playing in Excel, at which I'm a beginner, but I got it. It's the % return on equity part of the "1st year return" that is deceptive. The 1st year is far higher than the last. Here, a 15 year at 4.5%, it shows a starting return of 14% even though the overall return via leverage is 9.7%.

    I think I've built a pretty good Excel model of these returns. This one below modeling an expensive condo apartment explains why people buy negative cashflow "appreciation play" property. Even at only 5% appreciation, this yields 24.76%. As time passes, the return from the capital paydown diminishes, even more than my curve indicates since 5% appreciation increases the equity, but the rent will go up.  There's a lot of moving parts here, I wonder if I should start a thread just to discuss this stuff. Pretty fascinating.  I've been in the game decades, but never dove into this. Just bought and held!

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  • Patrick Soukup
    Rental Property Investor 路 Fort Collins, CO 路 Member since 2015 路 273 posts 路 127 votes
    7y

    @Johann Jells of course. This is why the annual return on equity calculation is so vital. I don鈥檛 pay attention to it much, because my goals are principal pay down, cash flow and acquisition. BUT if you watch your return on equity and yes, your return will diminish over time as more principal and less interest is paid with your monthly debt service. As an investor you need to decide if your equity could be placed elsewhere and provide a stronger return. Again, I don鈥檛 play that game, but am getting to a point where I may look more into it as my properties more and more get paid off.

    Thanks for providing that in depth analysis. Numbers are my jam and I loved looking at yours.

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  • Johann Jells
    Rental Property Investor 路 Jersey City, NJ 路 Member since 2011 路 1k+ posts 路 876 votes
    7y

    @Patrick Soukup This stuff is a rabbit hole! I'm currently trying to build a graph that includes appreciation in the capital returns.  I looked at the site's buy n hold calc, but I don't like not being able to see the inputs on the same page.

    What I'm trying to see ultimately is the return on a turnkey condo in my city. That would be easy to add to my current portfolio in terms of management without the maintenance headaches of a multifamily. I own 3 of those and don't want more roofs, yards and boilers!

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  • Patrick Soukup
    Rental Property Investor 路 Fort Collins, CO 路 Member since 2015 路 273 posts 路 127 votes
    7y

    @Johann Jells I get that. Economies of scale is a big philosophy of mine. Location, type and size. I have a few rando's in there, but that was because of the deal was too good not to hop on. 

    I'm sure it is the same with you, having the focus purely be cash flow, but it is always nice to see how strong of an investment real estate can be when investigating all of the real benefits.

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  • Johann Jells
    Rental Property Investor 路 Jersey City, NJ 路 Member since 2011 路 1k+ posts 路 876 votes
    7y
    Originally posted by @Patrick Soukup:

    @Johann Jells I get that. Economies of scale is a big philosophy of mine. Location, type and size. I have a few rando's in there, but that was because of the deal was too good not to hop on. 

    I'm sure it is the same with you, having the focus purely be cash flow, but it is always nice to see how strong of an investment real estate can be when investigating all of the real benefits.

    Actually, no, not ever. Originally bought a multi just to have low housing and workspace costs, 2nd property actually didn't cashflow for a long time, but was in an area due for a major gentrification bump. That took a decade! 3rd was a steal even in 2012, cashflowed then and more now, but also appreciated >150%.

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